Does membership in international organizations increase governments’ credibility? Testing the effects of delegating powers

Abstract

This paper analyzes whether nation-state governments can increase their credibility by becoming members of international organizations. It is hypothesized that the degree of delegation to international organizations can improve the credibility of nation-state governments. This hypothesis is tested by introducing three new indicators for international delegation. On the basis of panel data for up to 136 countries and the time period from 1984 to 2004, membership in international organizations is significantly and robustly linked with better credibility, here proxied for by country risk ratings.

Introduction

Membership in international organizations is often considered to have beneficial consequences for their member countries – as well as for the international community at large. The WTO is supposed to enhance international trade, the IMF is supposed to stabilize the international financial system, the UN are supposed to increase security and peace to name but a few possible examples. But what do we really know about the consequences of being a member in international organizations? Rose (2004a) is unable to show that GATT/WTO membership has increased international trade whereas Tomz et al. (2007) find that membership – rightly conceptualized – does increase trade. In addition, there is evidence that membership in international organizations bears direct benefits for these members: Temporary members of the UN Security Council, e.g., receive larger loans from the United States, as well as more programs and projects from the IMF and the World Bank (Kuziemko and Werker, 2006, Dreher et al., 2009a, Dreher et al., 2009b). Countries serving on the Board of Executive Directors at the World Bank receive substantially larger credits than other countries (Kaja and Werker, 2010). In this paper, we are interested in a slightly different question, namely whether membership in international organizations (IOs) increases the credibility of member countries – and thus confers privileges onto their members.

It has often been pointed out that it can be a disadvantage for a government to be too strong (e.g., Weingast, 1993). A state that is strong enough to protect private property rights and to enforce private contracts is also strong enough to expropriate private wealth. This could be called the dilemma of the strong state. Rational subjects know this and will therefore invest less than they would if they could be sure that the state will not misuse its strength. States that have not had the chance to build up a reputation as meticulously sticking to their own promises will be especially affected. In such cases, the creation of domestic independent agencies will often not be a credible commitment because such agencies can be abolished with relative ease. It might therefore be rational for these countries to delegate relatively more powers internationally. Majone (1996, p. 12) has even argued that “credibility, rather than the legitimate use of coercion is now the most valuable resource of policy-makers.” We test whether policy-makers can “buy” credibility by delegating powers internationally – or whether they will have to “make” it on the nation-state level.

Levy and Spiller (1994, p. 210) have dealt with the issue of regulatory commitment and have hypothesized that countries without an independent judiciary will have difficulties to develop credible domestic regulatory systems. In such cases, “alternative mechanisms of securing commitment (like international guarantees) will be necessary (ibid.).” Increasing one’s credibility via international delegation appears a plausible idea. Yet, the literature about the economic effects of such delegation developed only recently,¹ and many questions have not yet been addressed. This paper aims at providing some preliminary answers to the question whether international delegation of competences increases government credibility.

We construct three different indicators to measure the degree of international delegation that a government has committed to. On the basis of up to 136 countries, all three indicators are significant for explaining the observed variation in the countries’ risk ratings that are used as a proxy for credibility here. This is the case even after controlling for other variables such as openness to trade, inflation, GDP growth or the real interest rate. Membership in the GATT/WTO, membership in the International Center for the Settlement of Investment Disputes (ICSID), and ratification of the Optional Protocol on the abolition of the death penalty are particularly conducive to boost credibility.

In this paper, the delegation decisions of governments are taken as exogenously given. We are thus not interested in explaining delegation decisions but in their consequences. The remainder of the paper is organized as follows: The next section contains our arguments in favor of the presupposition that the international delegation of powers could have credibility-enhancing effects. Section 3 proposes a number of ways to make international delegation measurable – and thus comparable. In Section 4, our estimation approach is presented and Section 5 presents the results. Section 6 contains a number of extensions and Section 7 concludes.